China’s ‘system-friendly’ response

A step toward global rebalancing?

Ian Bremmer

Nick Consonery

Beijing seems strangely unconcerned about the global market turmoil caused by fears of a second global recession. U.S. economic data over the past month has been disappointing, to say the least. The sharp sell-off in European markets at the beginning of the week hints that the continent’s sovereign debt levels have become a persistent wound that rather than healing is developing a life-threatening infection. Brazil, meanwhile, unexpectedly cut interest rates to protect their domestic growth.

But rather than pulling out all the stops to prepare for another slowdown, the Chinese government is still taking steps to slow its own economy. The speed of yuan appreciation –which will make Chinese exports more expensive on global markets — surprised markets over the past month. Beijing also hinted recently that it might take some steps to slow momentum in its domestic auto sector, even though it used subsidized auto sales to stimulate the economy in 2009. And Premier Wen Jiabao reiterated his government’s commitment to inflation-fighting last week, meaning that liquidity will remain constrained in China, further restricting growth.

There are several theories to explain China’s unexpected behavior. One is that the Chinese government is actually feeling a bit more confident about global growth than some of its peers in the developing world. Another is that Beijing has no choice but to continue tightening, given ongoing concerns that the economy is overheating and driving inflation. A third is that shifting politics in Beijing are facilitating economic reform.

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